This startup is the new secret weapon investors are using to outsmart each other

After news broke that Chipotle had a norovirus outbreak,
financial experts expected sales to drop as stores closed in the
aftermath. Yet no one knew how bad the financial damages
would be until four months later when Chipotle delivered its
results.

Except for investors using a tool called Second Measure. They
already knew its sales hadn’t recovered — and they knew which
restaurants Chipotle’s customers had turned to instead.

Many analysts could have guessed Chipotle’s sales hadn't
recovered, but wouldn’t have recognized that the surprise winner
were meal kits, like Blue Apron, and Chili's.

Hedge funds and venture capitalists alike are turning to this
new Silicon Valley startup for their next information edge.
Second Measure takes billions of anonymized credit card
transactions and analyzes them so investors can see where
consumers are voting with their dollars before a company’s
quarterly earnings come out.

To venture capitalists looking at private companies, it was
immediately addicting, said Rodolfo Gonzalez of Foundation
Capital, which invested in Second Measure.

“It's like catnip to investors,” he said. "You rarely have access
to ths kind of data and in such a digestible way as well."

Shining the light

Mike Babineau was working at a video game company when a friend
of a friend who worked at a hedge fund called him for help.
The investor had 2 terabytes of data sitting on a hard drive that
he wanted to analyze and he wanted to know how to upload it
to Excel.

If he’d had the technical knowledge or an engineering team
available to help, he would have known Excel was not the answer.
To Babineau, though, it was a wake up call on how much
better informed investors could be if they had the tools to read
the data.

"That really caught our attention because it was the first time
that we saw how the hedge fund space is operating," Babineau
said. "Most funds are investing billions of dollars without any
sort of technical expertise."

Babineau and cofounder Lillian Chou started digging into all of
the alternative data sources hedge fund managers use, from
LinkedIn scrapes to forecast layoffs or watching Google
trends.

"They're looking for non-traditional data sources, and theses
sources have this common characteristic for many of them that
they're really hard to use," Babineau said.

After
Chipotle had a norovirus outbreak, customers started eating at
other restaurants. The blue boxes represent the % gain in share
of meal-transaction after the outbreak.Second
Measure

Babineau and Chou first worked on a tool where they would take
care of the back-end work of cleaning up the data and making it
usable, and then investors could use a tool like Tableau to chart
it. But even with data easily available, investors found it hard
to analyze because they were used to reading quarterly reports,
not determining cohort retention for private companies.

So the company decided to become both a source of consumer
spending data and the ones to analyze it.

Due to strict confidentiality agreements, Second Measure can’t
say exactly where it receives its data from, but says it works
with a massive quantity of anonymized consumer spending data, and
that this data makes up a representative selection of
2-3% of all credit card transactions. The data is not coming from
retailers or other companies Second Measure tracks, and not
from individual tracking, which suggests the company has a deal
with one or more banks, credit card companies, or credit
agencies, but Second Measure would not confirm this.

Regardless, it's got detailed data about billions of credit
card transactions, and it’s only increasing as the company
crunches through data every day.

Second Measure employs a part-human, part-machine approach to
extract the data from each transaction down to the
store location before displaying it in a dashboard that investors
can play around with.

"If you look at your credit card statement, it may say Macy's
store 512. That may not mean anything to you, but it does
for us from our perspective," Chou said.

Beyond the numbers

Investors using Second Measure all get access to the same data,
but they gain a personal edge by deciding how to use it. The
company built a simple dashboard that’s so secret you can only
see it through a company demo.

The “catnip” Gonzalez described is when investors start digging
through the dashboard and into the retention rates of customers,
average customer order spend, and wallet share — and then break
it down by geography. Has Hilton taken a hit because of Airbnb?
Did GrubHub sales tank when Maple launched in New York? Is
Dollar Shave Club really selling millions in razors?

It’s a rabbit hole of data that can be mixed and compared in
different ways — and something Gonzalez had never had with
companies public or private.

"It's fascinating. Every time that you mention that you have
access to this kind of data everybody gets extremely intrigued
and they all want to have a look,” Gonzalez said.

Consumer
spending data shows that once a VC-backed Philz coffee opens in a
neighborhood people start spending more on
coffee.Second
Measure

His firm, Foundation Capital, decided to invest in Second Measure
after seeing its pitch at Y Combinator’s Demo Day
earlier in summer 2015.

The startup is announcing Tuesday that it’s closed $2 million in
seed funding form a laundry list of Silicon Valley investors
including Y Combinator, Bessemer Venture Partners, Norwest
Venture Partners, and Shasta Ventures — all of whom have also
become clients looking for a competitive edge.

For instance, Foundation is using the platform to track
companies against peers and find new investment leads. There’s
also the advantage of being able to use qualitative data when
negotiating a funding round.

In a recent deal, Gonzalez said, the firm was able to talk down
a startup’s valuation by looking at their position in the
market compared to their competitors and objectively talk it
down. The nature of the discussions changed dramatically, and it
made it far less of an emotional negotiation that he’s dealt with
before, he said.

"For us, it has always been quite challenging to find information
about private companies,” Gonzalez said. "This is a little
glimpse of hope and a huge strategic advantage to identify
companies that might be doing really well."